ICPM Global Research Scanning Service

Each month, a relevant and timely academic paper is reviewed, summarized and featured here. Papers are sourced by pro-active scanning of influential journals and through collaborative efforts with international pension research institutes, think-tanks and like-minded organizations.

We welcome your suggestions for key topics and authors and invite submissions of published articles for consideration. To do so, please contact us. To access all of ICPM’s archived research Search ICPM Research and Archives.

August 2019

Climate Change, Firm Performance & Investor Surprises

Pankratz, N.M.C., Bauer, R., & Jeroen, D.

Central banks and financial regulators have recently expressed concerns that investors might not anticipate the effects of climate change. In this paper, Pankratz, Bauer and Derwall (2019) study two fundamental questions related to these concerns. Namely, whether physical climate risks do indeed affect the financial performance of listed firms, and, if so, whether investors are failing to anticipate these risks. View Summary

July 2019

The Spectre of the Giant Three

Bebchuk, L. A., and Hirst, S.

The landscape of the asset management industry is changing rapidly. A major trend is the explosive growth of index investing, driven by the vast and continuously increasing demand for index funds by institutional investors, individuals and their advisors. In this paper, Bebchuk and Hirst (2019) study the rise of the so called Big Three among the index fund managers, BlackRock, Vanguard, and State Street Global Advisors. View Summary

July 2019

First Impressions and Analyst Forecast Bias

Hirshleifer, D., Lourie, B., Ruchti, T., Truong, P.

The authors investigate whether analysts are subject to first impression bias, causing them to let first impressions of companies influence their forecasts of performance. First impression bias causes unreasonably optimistic (pessimistic) forecasts of future performance if a firm does particularly well (poorly) in the year before the analyst follows it. The authors assess this on the basis of field data, using a sample of 1,643,089 firm-announcement-analyst observations spanning from 1983 until 2016. View Summary

June 2019

A Fistful of Dollars - Financial Incentives Improve Retirement Information Search

Bauer, R., Eberhardt, I. & Smeets, P.

Under-saving for retirement is a problem in the Netherlands, where one in three Dutch people has a savings gap. Individuals can fill this gap with private savings; however, they first need to be aware of their potential savings gap, which rarely is the case. While pension awareness in the Netherlands is very low, Dutch pension funds pay $397.54 million per year for their communication with the participants, which is required by Dutch regulators. This money is lost, though, if participants do not read the communication. It is therefore important to understand how to effectively communicate with pension participants so they become informed about their pensions. View Summary

May 2019

Bubbles and Financial Professionals

Utz Weitzel, Christoph Huber, Juergen Huber, Michael Kirchler, Florian Lindner, Julia Rose

The efficiency of financial markets, but also their potential to produce bubbles are central topics in academic and professional debates. Yet, little is known about the contribution of financial professionals to price efficiency. We run 116 experimental markets with 412 professionals and 502 students. We find that professional markets with bubble-drivers - capital inflows or high initial capital supply - are susceptible to bubbles, although they are more efficient than student markets. In mixed markets with students, bubbles also occur, but professionals act as price stabilizers. We show that heterogeneous price beliefs drive overpricing, especially in bubble-prone market environments.View Summary

March 2019

Much Ado About Nothing: A Study of Differential Pricing and Liquidity of Short and Long Term Bonds

Joost Driessen, Theo Nijman, Zorka Simon

Are yields of long-maturity bonds distorted by demand pressure of clientele investors, regulatory effects, or default, flight-to-safety or liquidity premiums? Using data on German nominal bonds between 2005 and 2015, we study the differential pricing and liquidity of short and long maturity bonds. We find statistically significant, but economically negligible segmentation in yields and some degree of liquidity segmentation of short-term versus long-term bonds. These results have important policy implications for the e17.5 trillion European pension and insurance industries: long maturity bond yields seem appropriate for the valuation of long-term liabilities.View Summary

March 2019

When Investors Call for Climate Responsibility, How Do Mutual Funds Respond?

Marco Ceccarelli, Stefano Ramelli, Alexander F. Wagner

In April 2018, the investment platform and financial advisor Morningstar introduced a new eco-label for mutual funds, the Low Carbon Designation (LCD). The unexpected release of this label induced responses by (1) investors and (2) mutual funds. First, investors flocked to funds labeled as Low Carbon. Through the end of 2018, such funds enjoyed a 3.1% increase in assets compared to otherwise similar funds. This effect was distinct from that of more generic sustainability ratings ("Globes"), and it reversed for funds that lost the label in August or November 2018. Second, managers of just-missing funds adjusted their holdings towards lower carbon risk and lower fossil fuel involvement, the two criteria used to assign the LCD. Both the rewards-for-LCD and the moving-towards-LCD effects are stronger for European funds, retail funds, funds with weak financial performance, and low-sustainability funds. Overall, the findings suggest that as investors become more sensitive to the topic of climate change, financial intermediaries also use existing investment vehicles to respond to the increasing demand for climate-conscious investment products.View Summary

March 2019

Governance under the Gun: Spillover Effects of Hedge Fund Activism

Nickolay Gantchev, Oleg Gredil, Chotibhak Jotikasthira

Hedge fund activism is associated with improvements in the governance and performance of targeted firms. In this paper, we show that these positive effects of activism reach beyond the targets, as non-targeted peers make similar improvements under the threat of activism. Peers with higher threat perception, as measured by director connections to past targets, are more likely to increase leverage and payout, decrease capital expenditures and cash, and improve return on assets and asset turnover. As a result, their valuations improve, and their probability of being targeted declines. Our results are not explained by time-varying industry conditions or competition effects whereby improved targets force their product market rivals to become more competitive.View Summary

March 2019

The Neglected Role of Justification under Uncertainty in Corporate Governance and Finance

Claire A. Hill, Alessio M. Pacces

The big corporate governance debates nowadays concern the corporation’s time horizons, and the balance of power between shareholders and managers. In response to actual and anticipated pressure from shareholder activists – typically, activist hedge funds – companies are, some say, becoming too short-term. If this story is credited, shareholders, as well as the greater society are being harmed. We argue here that this story may reflect, at least in part, a heretofore neglected facet of decisionmaking: an actor’s accountability, and consequently, her anticipated need to justify her decision in the case of a bad outcome. Our account does three novel things. First, we demonstrate that the need to justify is pervasive. Our account identifies a type of agency cost, “justification costs,” resulting from decisions motivated by justification. Under conditions of uncertainty, justification costs are higher. By contrast, in conditions of less uncertainty, the most justifiable decision is apt to be the decision made without regard to justification. Second, to our knowledge, the relationship between these sorts of agency costs and more traditional agency costs, such as those involving selfdealing or empire building, has not been considered. Reducing traditional agency costs typically means increasing accountability and the consequent anticipated need for justification; by contrast, reducing costs of justification generally means increasing managerial leeway, which might increase traditional agency costs. Third, and most importantly, we introduce a role for uncertainty. Under conditions of low(er) uncertainty, more accountability does not necessarily increase justification costs, which are apt to be low in any event, and does reduce traditional agency costs. But under conditions of uncertainty, accountability increases justification costs, potentially in an amount greater than any reduction in traditional agency costs; under some circumstances, reducing accountability, thereby granting managers more leeway, may be preferable. We propose a mechanism by which managers and stockholders can agree on granting managers some leeway for a specified period of time, in the form of “ControlEnhancing-Mechanisms” (CEMs). A CEM might, or might not, condition continuing leeway during the period on management’s meeting certain agreed-upon conditions. We consider how our argument as to the existence of justification costs might apply in some private and public financial contexts, and suggest some solutions in those contexts as well. View Summary

February 2019

Why Are Firms With More Managerial Ownership
Worth Less?

Kornelia Fabisik, Rüdiger Fahlenbrach, René M. Stulz, Mirco Rubin

Using more than 50,000 firm-years from 1988 to 2015, we show that the empirical relation between a firm’s Tobin’s q and managerial ownership is systematically negative. When we restrict our sample to larger firms as in the prior literature, our findings are consistent with the literature, showing that there is an increasing and concave relation between q and managerial ownership. We show that these seemingly contradictory results are explained by cumulative past performance and liquidity. Better performing firms have more liquid equity, which enables insiders to more easily sell shares after the IPO, and they also have a higher Tobin’s q. View Summary

January 2019

The Impact of Pension and Insurance on Global Yield Curve

Robin Greenwood, Annette Vissing-Jorgensen

We document a strong effect of pension and insurance company (P&I) assets on the long end of the yield curve. Using data from 26 countries, the yield spread between 30-year and 10-year government bond yields is negatively related to the ratio of pension assets (in funded and private pension and life insurance arrangements) to GDP, suggesting that preferred-habitat demand by the P&I sector for long-dated assets drives the long end of the yield curve. We draw on changes in regulations in several European countries between 2008 and 2013 to provide well-identified evidence on the effect of the P&I sector on yields and to show that P&I demand is in part driven by hedging linked to the regulatory discount curve. When regulators reduce the dependence of the regulatory discount curve on a particular security, P&I demand for the security falls and its yield increases. These effects extend beyond long government bonds. Our results suggest that pension discount rules can have a destabilizing impact on bond markets that reverses once rules are changed.View Summary

January 2019

Reconsidering Returns

Samuel M. Hartzmark, David H. Solomon

Investors' perception of performance is biased because the relevant measure, returns, is rarely displayed. Major indices ignore dividends, inducing mechanical underperformance on ex-dividend days. Newspapers are more pessimistic on these days, consistent with mistaking the index for a return. Market betas should track returns, but track prices more than dividends, creating predictable market returns. Mutual funds receive inflows for “beating the S&P 500,” comparing the price-only index with the fund's net asset value change (also not a return). Displaying returns by default would ameliorate these issues, which arise despite high attention and little ambiguity regarding the appropriate measure. View Summary

December 2018

Pension Fund Interconnectedness and Herd Behavior

R. Bauer, M. Bonetti, D. Broeders

We use a unique dataset on the governance structures of 191 Dutch pension funds to study the effect of interconnections on strategic investment decisions in alternative assets. The interconnections are determined through trustees, actuaries, or dominant asset managers who provide services to multiple pension funds. We use spatial econometrics and find that pension funds that are interconnected via actuaries or dominant asset managers change their strategic allocations in the same direction over time, which is in line with herding. The effect of interconnections can be sizable. A pension fund interconnected to two other pension funds through the same dominant asset manager will increase on average its allocation to alternative investments by 2.5 percent if both pension funds increase their allocation by 10 percent, all else being equal. Conversely, pension funds interconnected via trustees display independent strategic asset allocations. Interconnections facilitate the transfer of information. However, herding can lead pension funds to develop an alternative asset class portfolio that is not in line with their liability structure, size, or knowledge level. View Summary

December 2018

Technology and Corporate Governance: Blockchain, Crypto and Artificial Intelligence

M. Fenwick, E.P. Vermeulen

Over recent decades, the on-going “digital revolution” has transformed many aspects of everyday life. Think of the increased power and shrinking size of personal computers and smartphones; the global expansion of the Internet and the new forms of social interaction that have been created; and, the ready availability of massive amounts of cloud-based information (“Big Data”), which is processed by automated algorithms for use in multiple settings. But, how has the digital transformation affected the organization and operation of a business, and what does this mean for current regulatory frameworks, particularly those related to corporate governance? And, how are current and near-future technological developments think distributed ledger technologies, “smarter” forms of automation and artificial intelligence likely to disrupt the current corporate governance discussion? This paper explores these questions and concludes that current corporate governance approaches need to adapt to these technological and business developments in order to remain relevant. View Summary

December 2018

The Private Equity Return Gap

S. Larocque, S. Shive, J. Sustersic Stevens

Investors in private equity funds do not control the timing of their cash flows to and from the fund. The internal rate of return (IRR), the most popular measure of returns for private equity investors, is affected by cash flow timing, while the cash-on-cash multiple is not. Any gap between a fund's reported IRR and the return implied by the cash-on-cash multiple arises from exogenous shocks to cash flows and/or the timing choices of the fund's general partner (GP). In a sample of 3,915 private equity funds, we find that return gaps average over half of the magnitude of reported IRRs, are larger than expected, and persist across a GP's funds. High return gaps are negatively related to the GP's future performance, but facilitate future fundraising, especially among certain investor types (funds of funds, insurance companies, and private pension funds) and among relatively unsuccessful investors. View Summary

December 2018

Risks and Returns of Cryptocurrency

Y. Liu, A. Tsyvinski

We establish that the risk-return tradeoff of cryptocurrencies (Bitcoin, Ripple, and Ethereum) is distinct from those of stocks, currencies, and precious metals. Cryptocurrencies have no exposure to most common stock market and macroeconomic factors or to the returns of currencies and commodities. In contrast, we show that the cryptocurrency returns can be predicted by factors which are specific to cryptocurrency markets – there is a strong time-series momentum effect and proxies for investor attention strongly forecast cryptocurrency returns. Finally, we create an index of exposures to cryptocurrencies of 354 industries in the US and 137 industries in China. View Summary

November 2018

Get Real! Individuals Prefer More Sustainable Investments

R. Bauer, T. Ruof, P. Smeets

We find that 66.7% of the participants favor to invest their pension savings in a sustainable manner. This choice is driven by social preferences. As a result of these strong social preferences we find no difference between the real and hypothetical treatment groups. View Summary

October 2018

Presidential Address: Pension Policy and the Financial System

David Scharfstein

The paper examines the effect of pay-as-you-go and private pension policies on the structure of financial systems in 23 countries part of the Organization for Economic Cooperation and Development (OECD). The author provides theoretical and empirical evidence supporting the hypothesis that policies that promote pension savings also promote the development of the financial system. View Summary

October 2018

Temporal Reframing and Savings: A Field Experiment

Hershfield, H., Shu, S., & Benartzi, S. (2018)

Does framing savings in larger or smaller fractions (for example $5 per day versus $150 per month) affect willingness to enroll in a savings plan? The authors investigated this issue in a field experiment in collaboration with 8,391 new users of the financial technology platform Acorns. View Summary

September 2018

Network Centrality and Delegated Investment Performance

A. Rossi; D. P. Blake; A. Timmermann; I. Tonsk; R. Wermers

The paper studies the relation between the network centrality of asset managers and fund manager performance, risk taking, fund flows and fund manager tenure. Where network centrality is a measure of the number of pension funds for which a fund manager oversees the management of the portfolio. View Summary

August 2018

Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows

Hartzmark, S. M., & Sussman, A. B.

In principle, investor preferences with regard to sustainability can diverge widely: While some apprehend that sustainable investments are value-reducing, others expect the opposite – and yet others might not expect financial benefits, but still prefer sustainable over conventional investments for non-pecuniary reasons. View Summary

July 2018

Trust and Shareholder Voting

Lesmeister, S., Limbach, P., & Goergen, M.

Despite the fact that most institutional investors and asset managers operate on a global scale, the research on the role that culture plays in investor decisions is relatively scarce.
View Summary

June 2018

Why and how investors use ESG information: Evidence from a global survey

Amir Amel-Zadeh, Said Business School, University of Oxford, and George Serafeim, Harvard Business School

In a recent study, Amel-Zadeh & Serafeim (2017) survey traditional fund managers and consolidate their insights on how the industry makes use of non-financial information on environmental, social, and governance factors.
View Summary

June 2018

Destabilizing Financial Advice: Evidence from Pension Fund Reallocations

Zhi Da, University of Notre Dame, Borja Larrain, Pontificia Universidad Catolica de Chile, Clemens Sialm, University of Texas at Austin - McCombs School of Business and José Tessada, Pontificia Universidad Católica

When one financial advisory firm reaches many investors, this can lead to coordinated fund flows, price pressure and heightened volatility. This paper investigates the situation of the Chilean Defined Contribution system.
View Summary

June 2018

Supporting decision-making in retirement planning: Do diagrams on pension benefit statements help?

Pete Lunn, ESRI, and Féidhlim McGowan, Trinity College Dublin

Former studies have found that pension knowledge is low, and as such, so are contribution rates and additional savings for retirement. Simplifying information with the help of diagrams might be one solution to increase pension knowledge and, ultimately, to motivate better savings decisions. This paper studies whether participants better recall and comprehend information when it is displayed visually.
View Summary

May 2018

The Return Expectations of Institutional Investors

Aleksandar Andonov, Erasmus University Rotterdam, and Joshua D. Rauh, Stanford Graduate School of Business

Drawing on newly-required disclosures for U.S. public pension funds, a group that manages approximately $4 trillion of assets, the authors find that institutional investors rely on past performance in setting future return expectations. These extrapolated expectations affect their target asset allocations.
View Summary

May 2018

Blockchain Technology for Corporate Governance and Shareholder Activism

Anne Lafarre, Tilburg University, Christoph Van der Elst, Tilburg Law School

Organizing AGMs is costly for the organizing firms, the participation is a financial burden particularly for small shareholders, and their effectiveness is subject to controversial debates. Lafarre and Van der Elst (2018) discuss current issues surrounding AGMs and shareholder voting, and how the introduction of blockchain technology could help make them more efficient.
View Summary

April 2018

Corporate ESG Profiles and Investor Horizons

Laura T. Starks, University of Texas at Austin, Parth Venkat, Securities and Exchange Commission, and Qifei Zhu, University of Texas at Austin

Many ESG practices, e.g. curbing environmental pollution, contribute to the improvement of firm performance as well as reduction of litigation risks in the long-run but can be costly in the short-term. Therefore, investors with different time horizons may disagree on the value of ESG projects.
View Summary

April 2018

‘Since You’re So Rich, You Must Be Really Smart’: Talent and the Finance Wage Premium

Michael J. Böhm, University of Bonn, Daniel Metzger, Stockholm School of Economics, and Per Strömberg, Swedish House of Finance

In a competitive labor market, wages should rise if the marginal productivity of workers increases. A leading explanation for the surge in finance pay has thus been that finance workers have become relatively more productive compared to other sectors over this period.
View Summary

March 2018

Investor Ideology

Patrick Bolton, Tao Li, Enrichetta Ravina, and Howard Rosenthal

Classical financial theory suggests that shareholders’ main concern is the maximization of firm value, and that this determines their voting behaviour. However, the records actually suggest that shareholders disagree substantially when it comes to the vote on governance, social, and environmental proposals, and more than financial theory would predict.
View Summary

February 2018

The Power of Percentage: Quantitative Framing of Pension Income

Henriëtte Prast and Federica Teppa

The authors of this paper apply the concept of framing effects to pension communication. They ask whether framing the same replacement ratio in different ways yields different outcomes with respect to the satisfaction with this replacement ratio.
View Summary

January 2018

Small cues change savings choices

James J. Choi, Emily Haisley, Jennifer Kurkoski and Cade Massey

Can one to two sentences influence contribution rates to a 401(k) plan, even if the cues do not add information? The authors answer this question by running two field experiments with employees of a large technology company.
View Summary

December 2017

Private Equity and Human Capital Risk

Manfred Antoni, Ernst Maug and Stefan Obernberger

We study the impact of leveraged buyouts in Germany on employees’ wages, employment, and career paths. We contrast different views of buyouts, which see LBOs as facilitators of organizational and technological modernization, or as vehicles for transferring wealth from employees to shareholders. We conduct matched-sample difference-in-differences estimations with more than 147,000 LBO employees and a carefully matched control group. LBOs increase annual income in the short term, but reduce income by about 11% in the long term. White-collar workers and middle management lose most, probably because of organizational streamlining. LBOs in our sample do not foster trends related to technological modernization such as skill-biased technological change or job polarization. We find a strong negative impact of LBOs for older employees, but no support for the notion that shareholders benefit from LBOs by forcing employees to accept lower wages. All human capital impairments are borne by employees who leave the firm and become unemployed or employed in a different industry.
View Summary

November 2017

How Do Consumers Respond When Default Options Push the Envelope?

John Beshears, Harvard University, Shlomo Benartzi, University of California, Richard T. Mason, City, University of London, and Katherine L. Milkman, University of Pennsylvania

Many employers have increased the default contribution rates in their retirement plans, generating higher employee savings. However, a large fraction of employers are reluctant to default employees into savings rates that are high enough to leave those employees adequately prepared for retirement without supplementary savings. There are two potential concerns regarding a high default: (i) it may drag an employee along to a high contribution rate even when this outcome is not in the employee’s best interest, and (ii) perhaps more importantly, it may cause an employee to opt out of plan participation entirely. We conducted a field experiment with 10,000 employees who visited a website that facilitated savings plan enrollment. They were randomly assigned to see a default contribution rate ranging from 6% (a typical default) to 11%. Relative to the 6% default, higher defaults increased average contribution rates 60 days after a website visit by 20-50 basis points of pay off of a base of 6.11% of pay. We find little evidence that the concerns with high defaults are warranted, although the highest default (11%) increases the likelihood of not participating by 3.7 percentage points. The evidence suggests that erring on the high side when choosing a default contribution rate is less likely to generate unintended consequences than erring on the low side.
View Summary

October 2017

A cross-country study of saving and spending in retirement

Jennifer Alonso-García, Hazel Bateman, Johan Bonekamp, Arthur van Soest and Ralph Stevens

Presenting at ICPM Amsterdam 2017 Discussion Forum

Globally, more reliance is increasingly being placed on pre-funding as an ageing demographic renders unfunded social security structures unsustainable. Prefunding creates very large privately held retirement asset pools in pension funds and insurance companies as the system matures. For example, current assets under management total AUD2.2 trillion in Australia and in the Netherlands, more than 100% of GDP in each case. To better design insurance products offered during retirement, insurers and policymakers need to understand the retirement savings preferences of people in retirement. The emphasis of the literature has been on the empirical analysis of rational explanations of individuals saving and spending conservatively during retirement. However, an increasing number of studies suggest that behavioural and psychological motives may be important to explain individual?s financial choices for (retirement) consumption and saving. In this project, we elicit the impact of pension policy design (prescribed longevity insurance versus flexibility of drawdown from a retirement accumulation) and health status (becoming frail and/or losing a spouse) on savings preferences in retirement. We do so by conducting an experimental survey of retirement saving and spending decisions of soon to retire households in Australia and the Netherlands. We find that expected health shocks or death of a spouse are associated with an increasing importance to save for health-related expenses, to provide for your spouse after death (intra-household bequest) and to have a peace of mind. Pension policy design (mandatory longevity insurance or flexibility) seems to have a reduced impact on saving preferences. Our results suggest that Australians and Dutch currently consuming conservatively during retirement do so primarily to save for health-related expenses and to be able to enjoy life at later stages of retirement. Insurance products that better meet the needs of increasingly heterogeneous retirement cohorts should take these insights into consideration.
View Summary

October 2017

The Fragility of Market Risk Insurance

Ralph S. J. Koijen, New York University, and Motohiro Yogo, Princeton University

Presenting at ICPM Amsterdam 2017 Discussion Forum

Insurers sell retail financial products called variable annuities that package mutual funds with minimum return guarantees over long horizons. Variable annuities
accounted for $1.5 trillion or 34 percent of U.S. life insurer liabilities in 2015. Sales fell and fees increased after the 2008 financial crisis as the higher valuation of existing liabilities stressed risk-based capital. Insurers also made guarantees less generous or stopped offering guarantees entirely to reduce risk exposure. We develop a supply-driven theory of insurance markets in which financial frictions and market power determine pricing, contract characteristics, and the degree of market incompleteness.
View Summary

September 2017

Can strong corporate governance selectively mitigate the negative influence of “special interest” shareholder activists? Evidence from the labor market for directors

Diane Del Guercio, University of Oregon and ECGI, and Tracie Woidtke, University of Tennessee

Empowering shareholders can mitigate managerial agency problems but also empower “special interest” activists. Union and public pension funds, the most prolific institutional activists employing low-cost targeting methods, are often accused of pursuing private benefits. Extant literature finds that workers, and unions representing them, as stakeholders are not aligned with shareholders. Thus, activists who are also stakeholders of targeted firms have potential conflicts of interest. We find evidence the director labor market can selectively mitigate the negative influence that conflicted activists have over firms, especially when directors are younger and have greater career concerns, without stifling all influence of low-cost activists.
View Summary

September 2017

Wolf Pack Activism

Alon Brav, Duke and NBER, Amil Dasgupta, London School of Economics, and Richmond Mathews, University of Maryland

Blockholder monitoring is key to corporate governance, but blockholders large enough to exercise significant unilateral influence are rare. Mechanisms that enable small blockholders to exert collective influence are therefore important. It is alleged that institutional blockholders sometimes implicitly coordinate their interventions, with one acting as “lead” activist and others as peripheral”wolf pack” members. We present a model of wolf pack activism. Our model formalizes a key source of complementarity across the engagement strategies of activists and highlights the catalytic role played by the leader. We also characterize share acquisition in pack formation, providing testable implications on ownership and price dynamics.

View Summary

August 2017

Financial Incentives Beat Social Norms: A Field Experiment on Retirement Information Search (Working Paper)

Rob Bauer, Inka Eberhardt, and Paul Smeets, Maastricht University

A lack of pension knowledge undermines adequate savings decisions. To understand what motivates individuals to inform themselves about their pension situation, we conducted a field experiment with 245,712 pension fund participants. We find that a small financial incentive is cost-effective and increases the rate by which individuals visit their personal pension website by 70%. Our experiment directly compares the effect of financial incentives to different social norms, which turn out to be ineffective in the pension domain. Financial incentives are effective regardless of gender, age and income, while nudges are ineffective for each subgroup.

View Summary

July 2017

Saving for Tomorrow Today: How Message Framing Can Improve Retirement Saving Rates for Younger Workers

Nicole Montgomery (University of Virginia), Lisa Szykman (College of William and Mary) and Julie Agnew (College of William and Mary)

Most Americans, particularly young people, are not saving enough for retirement, which can have serious financial consequences for their long-run financial wellbeing. It can also cause immediate, short-term problems for employers if enough younger, lower-paid employees do not contribute sufficiently to their company sponsored 401(k) plans. Failure to have broad employee participation in the plan can not only lower employee satisfaction but can also decrease a
company’s ability to recruit top talent. In this paper, we hypothesize that one reason younger workers do not sufficiently save is because retirement seems too far away to warrant action. We build on existing savings research by examining how to adjust communication strategies to improve intended savings rates for this group. In Study 1, we compare the relative responses of two different age groups: younger Millennial workers and older Baby Boomer workers. We find that younger people respond better to abstract versus concrete advertisements, whereas savings rates for older workers do not differ by communication type. We attribute these findings to how differences in distance to retirement alter how each age group construes the event. In Study 2, we show that younger workers’ savings intentions increase further when the savings goal is presented using concrete messaging and as a milestone versus a distant goal. Overall, this research demonstrates that by aligning goal time frames with perceptions of retirement, younger workers can be encouraged to make better long-term savings decisions that benefits themselves and their employers.

View Summary

June 2017

Activating Pension Plan Participants: Investment and Assurance Frames

Wiebke Eberhardt, Elisabeth Brüggen, Thomas Post and Chantal Hoet

Whereas pension reforms take place and populations grow older, most pension plan participants are inactive and do not take the time to examine their retirement savings situation. An important challenge that policymakers and pension providers therefore face is how to communicate effectively in order to foster greater awareness of the importance of pensions. In this paper we analyze the difference that communication framing can make in activating individuals. We first show that loss frames can be a powerful nudge, but that they also result in more negative emotions and evaluations compared to the gain frame. Second, we therefore develop two frames for pension communication, which tap into similar gain and loss mechanisms while avoiding the use of loss wording. The investment frame – the gain alternative – emphasizes that pension plan participants can gain by investing in their future and searching for information. By contrast, the assurance frame – the loss alternative – stresses that participants can prevent negative consequences through the sense of security that they obtain when learning about their expected pension benefits. We tested these two frames in the field with 7,315 participants of a defined contribution pension plan and found that assurance framing can be twice as effective in engaging participants to click on a movie link (explaining pension scheme changes). With these frames, we found no differences in evaluation or negative emotions.
View Summary

June 2017

The Term Structure of Returns: Facts and Theory

Jules H. van Binsbergen, The Wharton School and Ralph S.J. Koijen, The Wharton School

We summarize and extend the new literature on the term structure of equity. Short-term equity claims, or dividend strips, have higher average returns and Sharpe ratios than the aggregate stock market. The returns on short-term dividend claims are risky as measured by volatility, but safe as measured by market beta. These facts are hard to reconcile with traditional macro-finance models and we provide an overview of new models that can reproduce some of these facts. We relate our evidence on dividend strips to facts about other asset classes such as nominal and corporate bonds, volatility, and housing. We discuss the broader economic implications of our findings by linking the term structure of returns to real economic decisions such as hiring and investment. We conclude with an outline of empirical and theoretical extensions that we consider interesting avenues for future research.
View Summary

May 2017

Pension Fund's Illiquid Assets Allocation Under Liquidity and Capital Constraints

Dirk Broeders, De Nederlandsche Bank, Kristy Jansen, Tilburg University, and Bas J. M. Werker, Tilburg University

This paper empirically assesses the impact of liquidity and capital constraints on the allocation of defined benefit pension funds to illiquid assets. Liquidity constraints result from short-term pension payments and collateral requirements on derivatives. Capital constraints follow from the requirement to retain sufficient capital to absorb unexpected losses. Liability duration and hedging affect the allocation to illiquid assets through both these constraints. First, we find a hump-shaped impact of liability duration on the illiquid assets allocation. Up to 17.5 years, liability duration positively affects the illiquid asset allocation. However, beyond this point the effect is reversed as the capital constraint dominates the liquidity constraint. Second, we find no evidence that interest rate hedging affects the illiquid assets allocation. Third, we do find that currency risk hedging positively impacts the illiquid assets allocation.
View Summary

May 2017

On the Asset Allocation of a Default Pension Fund

Magnus Dahlquist, Stockholm School of Economics, Ofer Setty, Tel Aviv University, and Roine Vestman, Stockholm University

We characterize the optimal default fund in a defined contribution (DC) pension plan. Using detailed data on individuals and their holdings inside and outside the pension system, we find substantial heterogeneity among default investors in terms of labor income, financial wealth, and stock market participation. We build a life-cycle consumption-savings model incorporating a DC pension account and realistic investor heterogeneity. We examine the optimal asset allocation for different realized equity returns and investors and compare it with age-based investing. The optimal asset allocation leads to less inequality in pensions while it moderates the risks through active rebalancing.
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April 2017

The Best of Both Worlds: Accessing Emerging Economies via Developed Markets

Joon Woo Bae, University of Toronto, Redouane Elkamhi, University of Toronto, and Mikhail Simutin, University of Toronto

A growing body of evidence suggests that the benefits of international diversification via developed markets have dramatically declined. While emerging markets still offer diversification opportunities, their public equity indices capture only a fraction of economic activity of emerging countries. We propose a diversification approach that exploits the global connectedness of developed countries to gain exposure to emerging countries overall economies rather than their shallow equity markets. In doing so, we demonstrate that developed markets still offer substantial diversification benefits beyond those available through equity indices. Our results suggest that relying on equity indices to assess diversification benefits understates diversification gains.
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April 2017

Fintech, Regulatory Arbitrage, and the Rise of Shadow Banks

Greg Buchak, University of Chicago, Gregor Matvos, University of Chicago, Tomasz Piskorski, Columbia Business School, and Amit Seru, Stanford University

We study the rise of fintech and non-fintech shadow banks in the residential lending market. The market share of shadow banks in the mortgage market has nearly tripled from 2007-2015. Shadow banks gained a larger market share among less creditworthy borrowers, with a tilt towards refinancing mortgages. Shadow banks were significantly more likely to enter markets where traditional banks faced more regulatory constraints. This suggests that traditional banks retreated from markets with a larger regulatory burden, and that shadow banks filled this gap. Fintech firms accounted for almost a third of shadow bank loan originations by 2015. To isolate the role of technology in the decline of traditional banking, we focus on technology differences between shadow banks, holding the regulatory differences between different lenders fixed. Analyzing fintech firms’ entry and pricing decisions, we find some evidence that fintech lenders possess technological advantages in determining corresponding interest rates. More importantly, the online origination technology appears to allow fintech lenders to originate loans with greater convenience for their borrowers. Among the borrowers most likely to value convenience, fintech lenders command an interest rate premium for their services. We use a simple model to decompose the relative contribution of technology and regulation to the rise of shadow banks. This simple quantitative assessment indicates that increasing regulatory burden faced by traditional banks and financial technology can account, respectively, for about 55% and 35% of the recent shadow bank growth.
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April 2017

Individual Investor Activity and Performance

Magnus Dahlquist, Stockholm School of Economics and CEPR, José Vicente Martinez, University of Connecticut and Paul Söderlind, University of St. Gallen and CEPR

We examine the daily activity and performance of a large panel of individual investors from Sweden’s Premium Pension System. We find that active investors earn higher returns and risk-adjusted returns than do inactive investors. A performance decomposition analysis reveals that most outperformance by active investors is the result of active investors successfully timing mutual funds and asset classes. While activity is beneficial for some investors, extreme flows out of mutual funds affect funds’ net asset values negatively for all investors. Financial advisors, by contributing to coordinate investments and redemptions, exacerbate these negative effects.
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March 2017

Why Do Investors Hold Socially Responsible Mutual Funds?

Arno Riedl, Maastricht University; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute) and Paul Smeets, Maastricht University

To understand why investors hold socially responsible (SRI) mutual funds, we use administrative data and link them to survey responses and behavior in incentivized experiments. We find that both social preferences and social signaling are important factors for SRI decisions. Financial motives also play a role but appear to be of limited importance. Socially responsible investors in our sample expect to earn lower returns on SRI than on conventional funds and pay higher management fees. This suggests that investors are willing to forgo financial performance in order to invest in accordance with their social preferences.
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February 2017

First Impressions Matter: An Experimental Investigation of Online Financial Advice

Julie R. Agnew, Hazel Bateman, Christine Eckert, Fedor Iskhakov, Jordan Louviere, Susan Thorp

We explore how individuals assess the quality of financial advice they receive and how they form judgments about advisers. Using an incentivized discrete choice experiment, we show that first impressions matter: consumers more often follow advisers who dispense good advice before bad. We demonstrate how clients’ opinions of adviser quality can be manipulated by using an easily replicated confirmation strategy that depends on the quality of the advice and the difficulty and order of the advice topics. Our results also reveal how clients benefit from their own past experience and how they use professional credentials to guide their choices.
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January 2017

The Pied Piper of Pensioners

Conrado Cuevas and Dan Bernhardt

We document how retirement portfolio recommendations by a pension-advice firm, Happy and Loaded, affect pension investments by individuals in the Chilean social security system. Following H&L’s advice, investors shift amounts that often exceed 20% of a portfolio’s value and 1.3% of Chilean GDP, in a week. We document what drives investment recommendations, and the resulting return consequences for the Chilean stock market, social security portfolios, government bonds, and exchange rates. Paradoxically, investors who followed H&L’s advice would have earned more by sticking with their original portfolios. These findings provide a cautionary tale for the design of privatized social security systems.
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January 2017

Climate Risks and Market Efficiency

Harrison Hong, Frank Weikai Li and Jiangmin Xu

We investigate whether stock markets efficiently price risks brought on or exacerbated by climate change. We focus on drought, the most damaging natural disaster for crops and food-company cash flows. We show that prolonged drought in a country, measured by the Palmer Drought Severity Index (PDSI) from climate studies, forecasts both declines in profitability ratios and poor stock returns for food companies in that country. A port- folio short food stocks of countries in drought and long those of countries not in drought generates a 9.2% annualized return from 1985 to 2015. This excess predictability is larger in countries having little history of droughts prior to the 1980s. Our findings support regulatory concerns of markets inexperienced with climate change under-reacting to such risks and calls for disclosing corporate exposures.
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November 2016

Blockholders: A Survey of Theory and Evidence

Edmans, A. and Holderness, C. G.

This paper reviews the theoretical and empirical literature on the role of blockholders (large shareholders) in corporate governance. We start with the underlying property rights of public corporations; we discuss how blockholders are critical in addressing free-rider problems and why, like owners of private property in general, blockholders are likely to be active in firm governance. We then examine what distinguishes a blockholder from an ordinary shareholder and advocate additional definitions from the typical threshold of 5% ownership. We next present new evidence on the frequency and characteristics of blockholders in United States corporations. Then we develop a simple unifying model to present theories of blockholder governance through both voice (direct intervention) and exit (selling one's shares). We survey the empirical evidence on blockholder governance, emphasizing the empirical challenges in identifying causal effects involving blockholders We highlight the lack of credible instruments for blockholders and argue that exogenous variation should not be a prerequisite for research - a narrow focus on identification may lead to a focus on identifying narrow questions. We emphasize the value of descriptive research with blockholders and how endogeneity concerns can be addressed with economic logic and by directly testing alternative explanations. We close with suggestions for future research.
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October 2016

Political Representation and Governance: Evidence from the Investment Decisions of Public Pension Funds

Aleksandar Andonov, Yael V. Hochberg, Joshua D. Rauh

We examine how political representatives affect the governance of organizations. Our laboratory is public pension funds and their investments in the private equity asset class. Representation on pension fund boards by state officials or those appointed by them—often determined by statute decades past—is strongly and negatively related to the performance of private equity investments made by the fund. This underperformance is driven both by investment category allocation and by poor selection of managers within category. Funds whose boards have high fractions of members who were appointed by a state official or sit on the board by virtue of their government position (ex officio) invest more in real estate and funds of funds, explaining 20-30% of the performance differential. These pension funds also choose poorly within investment categories, overweighting investments in small funds, in-state funds, and in inexperienced GPs with few other investors. Lack of financial experience contributes to poor performance by boards with high fractions of other categories of board members, but does not explain the underperformance of boards heavily populated by state officials. Political contributions from the finance industry to elected state officials on pension fund boards are strongly and negatively related to performance, but do not fully explain the performance differential.
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October 2016

Do Long-Term Investors Improve Corporate Decision Making?

Jarrad Harford, Ambrus Kecskés, Sattar Mansi

We study the effect of investor horizons on a comprehensive set of corporate decisions. We argue that monitoring by long-term investors generates decision making that maximizes shareholder value. We find that long-term investors strengthen governance and restrain managerial misbehaviors such as earnings management and financial fraud. They discourage a range of investment and financing activities but encourage payouts. Innovation increases, in quantity and quality. Shareholders benefit through higher profitability that the stock market does not fully anticipate, and lower risk.
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September 2016

Behind the Scenes: The Corporate Governance Preferences of Institutional Investors

McCahery, J., Sautner, Z., & Starks, L.

Should I stay or should I go? This article provides insights into the actions of institutional investors and reveals their corporate governance preferences when engaging with firms. These insights can contribute to the effectiveness of shareholder engagement practices of long-horizon investors across the globe.
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September 2016

Book Review

The Smarter Screen: Surprising Ways to Influence and Improve Online Behavior

Benartzi, S. with Lehrer, J.

A compelling look at the delicate balance when designing online education tools to effectively reach, retain and educate people to enable them to make sound (investment) choices. A must-read for pension industry communications professionals.

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September 2016

Private Equity Portfolio Company Fees

Ludovic Phalippou, Christian Rauch, and Marc Umber

Issue: In private equity, General Partners (GPs) may receive fee payments from companies whose board they control. This paper describes the related contracts and shows that these fee payments sum up to $20 billion evenly distributed over the last twenty years, representing over 6% of the equity invested by GPs on behalf of their investors. Fees do not vary according to business cycles, company characteristics, or GP performance. Fees vary significantly across GPs and are persistent within GPs. GPs charging the least raised more capital post financial crisis. GPs that went public distinctively increased their fees prior to that event. We discuss how results can be explained by optimal contracting versus tunneling theories.

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August 2016

Pension Fund Asset Allocation and Liability Discount Rates

Aleksandar Andonov, Martijn Cremers, and Rob Bauer, Maastricht University

This paper studies the regulatory incentives of U.S. public pension funds to increase risk-taking arising from their unique regulation linking their liability discount rates to the expected return on assets, which enables them to report a better funding position by investing more in risky assets. Comparing public and private pension funds in the U.S., Canada, and Europe, U.S. public funds seem susceptible to these incentives. More mature U.S. public funds as well as funds with more political and participant-elected board members take more risk and use higher discount rates. The increased risk-taking of U.S. public plans is negatively related to their performance.

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July/August 2016

Standing on the shoulders of giants: The effect of passive investors on activism.

Appel, I., Gormley, T. A., & Keim, D. B.

Issue: Shareholder activism is on the rise again after a temporary decline in the number of activist campaigns throughout the financial crisis. With 343 recorded activist campaigns in 2014, the movement reached its peak since 2008 (see PwC study, 2015). Simultaneously, the extent to which firms are owned by passive investors keeps increasing. In a recent working paper, Appel, Gormley and Keim (2016) investigate the impact of passive ownership on the way that activist shareholders target mutually owned companies.

Who is Easier to Nudge?

Beshears, J., Choi, J. J., Laibson, D., Madrian, B. C. & Wang, S.

Issue: Research on pension plan design has increasingly focused on default options. On average, most people stick to a default contribution rate and hardly opt out of pension plans if this requires action. But who is easier to nudge? Is it women, the young, and/or employees with a high income? Why do some socio-demographic groups stick to a default longer than others? And do default contribution rates actually influence the implicit rate that people would like to contribute (called the target contribution rate)? Beshears et al. (2016) answer these questions by analyzing data of the 401(k) plans of ten large US companies.

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March 2019

Much Ado About Nothing: A Study of Differential Pricing and Liquidity of Short and Long Term Bonds

Joost Driessen, Theo Nijman, Zorka Simon

Are yields of long-maturity bonds distorted by demand pressure of clientele investors, regulatory effects, or default, flight-to-safety or liquidity premiums? Using data on German nominal bonds between 2005 and 2015, we study the differential pricing and liquidity of short and long maturity bonds. We find statistically significant, but economically negligible segmentation in yields and some degree of liquidity segmentation of short-term versus long-term bonds. These results have important policy implications for the e17.5 trillion European pension and insurance industries: long maturity bond yields seem appropriate for the valuation of long-term liabilities.View Summary


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